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Reducing Poverty by Reducing Government

Bob Herbert, op-ed columnist for The New York Times and perennial critic of the purported flaws of capitalism, has an article in the Times of October 8, 2004, titled "Working for a Pittance." The article, drawing on a study "Working Hard, Falling Short," complains about the low wages of 9.2 million working families and the plight of the 20 million children in these low-income working families.

It goes on to detail the high cost of housing, food, utilities, and transportation and notes the shock in store for such families this winter when price increases for crude oil show up in large increases in home heating bills. The clear implication of the article is that the federal government must do something to alleviate the plight of these families, such as sharply raising the minimum wage.

I accept the description of the facts of widespread poverty cited by Herbert, but I have a radically different solution for them than the kind that he and the rest of his colleagues at the Times would likely offer.

If one wants to raise the wages of the lowest paid workers, do not raise the minimum wage. Raising the minimum wage would only add to forced unemployment and cause the lack of any wages at all on the part of those added to the unemployment rolls. It would add to unemployment, because every rise in price (a wage rate is a price) serves to reduce the quantity of the good or service demanded. This is one of the best established laws of economics.

An increase in the minimum wage would also raise costs of production and thus serve to raise the prices paid by all workers. In addition, the tax burden of workers at all levels of income would be increased in order to support the increase in the number of unemployed. (The higher tax burden would not be limited to higher personal income taxes, which the poorest workers may not pay, but would also include higher sales taxes and higher prices caused by higher taxes on business firms and individual savers.)

Instead of raising the minimum wage as the means of increasing the wage rates of the unskilled and poor, abolish prounion legislation. Such legislation, above all, the Wagner Act of 1935, which established the National Labor Relations Board, compels employers to recognize and deal with labor unions and to accept union wage rates. This enables the labor unions to impose the equivalent of minimum wages throughout the economic system, including for semi-skilled and skilled workers, at much higher levels than the government’s own minimum wage.

Just like the government’s minimum wage, the higher wage rates imposed by the unions serve to reduce the quantity of labor demanded, this time, of course, in the ranks of the semi-skilled and skilled occupations as well as among unskilled workers. The effect is that workers are displaced from occupations of their choice and pushed into other occupations, enlarging the supply of labor in those other occupations and either depressing wage rates in them or, to the extent that that is prevented, causing unemployment in those other occupations.

For example, workers who might have been carpenters, plumbers, or electricians but who are denied employment in those lines by the height of union wage scales, are forced to seek work elsewhere, say, in factories or stores. To the extent that the would-be carpenters et al. who have been displaced are more capable than most of the workers working in factories or stores, the carpenters et al. will be likely to find employment in them. In order for the carpenters et al. to be absorbed in these lines alongside those already in them, wage rates in these lines would have to fall, to create the necessary increase in quantity of labor demanded. If these wage rates are prevented from falling, the effect of the carpenters et al. finding jobs in these lines is a further displacement of workers. Thus, workers who might have found work in factories or stores are in turn displaced and must find employment perhaps as busboys or gardeners. In an economy in which reductions in wage rates have been made almost impossible by prounion legislation, the ultimate effect is a displacement of labor to the lowest levels of employment and a corresponding unnecessary, artificial increase in the supply of labor at the bottom of the economic ladder.

This enlargement of the supply of labor at the bottom that is the result of prounion legislation, is the cause either of unnecessarily low wage rates at the bottom or unemployment, or some combination of both, depending on the height of the government’s minimum wage. The repeal of prounion legislation and the consequent increase of employment opportunities higher up on the economic ladder would reduce the supply of labor seeking employment at the bottom and thus make possible the employment of workers there at higher wage rates.

It is important to realize that the pernicious influence of prounion legislation is only very inadequately gauged by the proportion of workers belonging to labor unions. The ease with which businesses can be unionized, as the result of prounion legislation, compels employers who want to avoid being unionized to pay wages as high or higher than the union scales, so that they can tell their employees that nothing is to be gained by unionizing. This way, the employers can avoid the costs of union work rules and other obstacles the unions put in the way of improving the productivity of labor.

In this connection, it should be realized that the repeal of prounion legislation would make possible substantial increases in the productivity of labor in the important industries that the unions do directly control, such as automobiles, steel, construction, and transportation. Increases in the productivity of labor serve to enlarge the supply of goods relative to the supply of labor and thus to reduce prices relative to wage rates, which is to say that they raise real wage rates. Repeal of prounion legislation and thus the elimination of the power of the labor unions to hold down the productivity of labor would bring about substantial increases in the real wages of all workers.

The repeal or liberalization of licensing legislation, which also serves artificially to reduce employment opportunities in many fields, would result in the same kind of improvement in wage rates at the bottom of the economic ladder as the repeal of prounion legislation. Such legislation presently applies to doctors and dentists, optometrists and pharmacists, barbers and beauticians, and liquor stores and taxicabs, to name a few leading examples. In every case, it serves to hold down the number of those allowed to pursue an occupation and thus to raise the wage rates or prices of the smaller number remaining in the occupation, while depressing wages in the lines into which the displaced workers are driven. And if wage rates in those lines are prohibited from falling, the result, as shown, is a further displacement of workers into still less desirable occupations, with the process culminating in the displacement of workers into the least desired, lowest paying occupations, and resulting either in the lowest paying occupations becoming still lower paid or in unemployment. In either outcome, the heaviest burden is borne by the least skilled, least educated, and poorest members of the economic system.

Herbert and the authors of the report he cites are totally unaware of these effects of prounion and licensing legislation. He quotes the report approvingly when he writes: "Not surprisingly, the problem for millions of families is that they have jobs that pay very low wages and provide no benefits. `Consider the motel housekeeper, the retail clerk at the hardware store or the coffee shop cook,’ the report said. `If they have children, chances are good that their families are living on an income too low to provide for their basic needs.’" It never occurs to Herbert or the writers of the report that the wages of these workers are as low as they are because of the downward displacement of labor caused by prounion and licensing legislation.

As in the case of the repeal of prounion legislation, the ability of more workers to be employed in the presently licensed occupations would reduce the supply of labor needing to be employed at the bottom of the economic ladder. And, both it and the repeal of prounion legislation would bring about reductions in the cost and prices of all those products and services requiring the employment of labor that presently must be paid artificially high wage rates. The effect would be that the lowest paid workers, whose plight Herbert and the rest of the left continually lament, would earn higher wage rates while paying lower prices. Arbitrary inequalities in wages would be eliminated. That is, inequalities resulting not from inequalities in skill, ability, or the amount of work done, but inequalities resulting from government intervention and the monopolistic protections it gives to favored groups at the expense of the rest of the population, particularly the poor—these inequalities would be eliminated.

The take-home wages of all workers could be increased by the elimination of compulsory employee contributions to various government programs, such as social security and medicare, which now amount to over seven and a half percent of a low-paid worker’s income. Perhaps surprisingly to many people, take-home wages could also be increased by the elimination of government or labor-union mandated employer contributions as well. Imposing such contributions, whether for social security and medicare or for medical insurance, family leave, retirement, vacations, and holidays, or anything else, is tantamount to a forced increase in wage rates, i.e., it makes an employer pay more in order to employ the same labor. As such it results either in unemployment and higher prices or, if unemployment is to be avoided, in equivalent reductions in take-home wages.

To the extent that these reductions in take-home wages are not experienced by workers in the occupations receiving the supposedly employer-financed benefits, they are experienced by the kinds of workers described by Herbert and the report he cites—i.e., by workers in lines experiencing the additional displacement of labor caused by the increases in labor costs imposed by the mandated employer financing of employee benefits.

Just as the wage rates of workers, especially the lowest paid, could be substantially increased by the reduction of government interference, so too the prices paid by all workers could be substantially reduced by the reduction of government interference—in additional ways than those already explained.

There is no good reason, for example, for the price of oil to be over $50 a barrel and rising. In a free market, that is, a market not hampered by such things as regulations driven by environmentalist hysteria and a valuation of human well-being below that of caribou, there would be a substantially increased supply of oil from Alaska. There would also be an increased supply from offshore fields in the Gulf of Mexico and off the coast of California. And added to this would undoubtedly be major increases in the supply of oil from other parts of the United States, now ruled off limits to exploration and development because they have been set aside as wildlife preserves or wilderness areas. These increases in supply would substantially reduce the price of oil.

The price of oil would also be reduced by removing the obstacles in the way of the production of atomic power and the strip mining of coal. Increased supplies of atomic power and coal would serve to reduce the demand for oil and thus its price.

The price of food could be substantially reduced by the abolition of government farm subsidies.

The cost of housing could be reduced by the abolition of zoning laws and all other government interference serving to make land artificially scarce, such as the restrictions on land use imposed by the California Coastal Commission. It could be reduced by the liberalization of government mandated building and safety codes and by the withdrawal of government support for construction unions.

All of this would benefit everyone, but it would especially benefit the lowest paid, poorest workers, who can least afford unnecessarily high prices.

Just as there is no good reason for the price of oil being $50 a barrel, there is no good reason for the cost of a day’s hospital stay being $2,000. Give physicians the freedom to start their own hospitals, specializing in whatever kinds of care they wish, and the cost of hospital stays, at least for such conventional illnesses as pneumonia and appendicitis, will be driven down, toward a level of cost comparable to that of staying at a clean hotel, coupled with nursing care. At such low rates, all but the very poorest members of society might be able to afford an occasional brief hospital stay.

The enemies of capitalism and economic freedom shed crocodile tears over poverty. Their policies do not alleviate it but worsen it. They deprive many workers of the very possibility of working, and when those workers are permitted to work, compel them to be confronted with the needless competition of other workers driven from other lines of work by the same kind of policies. And they compel all workers, especially the poorest, to pay needlessly higher prices: all are compelled to pay higher prices insofar as the productivity of labor is held down; and the poorest in particular are compelled to pay higher prices as the result of the same monopolistic privileges that drive their wages down.

As I have shown, economic freedom, not government interference, is the means of overcoming poverty. It would do so both by raising the take-home wages of workers, especially those at the bottom of the economic ladder, and by reducing the prices paid by all workers.

Workers, the poor, and the public at large do not yet see the benefits of economic freedom. They have been misled by generations of intellectuals, such as Herbert, into believing that poverty is the result not of the failure to produce wealth but of the success of those who do produce it, above all, businessmen and capitalists. And so they have been led to believe that the means of alleviating poverty is the seizure of wealth from the businessmen and capitalists, who use their wealth overwhelmingly precisely in the production of wealth, and who produce less to the extent that they are deprived of the means of producing it. And in much the same way, people have been misled into believing that the means of alleviating poverty is government policies that are nothing more than various forms of prohibiting the production of wealth, or at least prohibiting substantial numbers of people from producing this or that particular form of wealth.

If workers, the poor, and the public at large understood their actual economic interests, they would rise up in outrage at the injustices foisted upon them. They would rise in outrage not against their usual targets, the businessmen and capitalists, who create the demand for the labor they sell and the supply of the products they buy, and who progressively raise real wages and the general standard of living by introducing ever newer and better products and more efficient methods of producing all products, but against the ignorant, incompetent politicians and intellectuals who have so misled them that moreoften than not they have been duped into positively yearning for the fetters that make them poor. It is time for everyone to open his eyes to the knowledge provided by the science of economics and to understand that it is economic freedom, not the government’s violations of economic freedom, that is the way out of poverty and is the foundation of prosperity for all.

George Reisman, Ph.D., is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is the translator of Ludwig von Mises’s Epistemological Problems of Economics (New York: D. Van Nostrand & Co., 1960). His web site is http://www.capitalism.net. See his Mises.org archive and Post comments on the blog.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.

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